Industry Assessment — Today's Threats & Opportunities

by
Steve Murray, Real Trends President
| May 16, 2019

FIRST PERSON

What can you learn from today’s threats? What are the opportunities brokerages should be seeking?

Real estate has long been an industry filled with new business models, lawsuits and emerging technology. It’s also an industry that offers unmatched opportunity. Here’s an outline of some of the threats and opportunities brokerage leaders are facing today. Plus, I’ll discuss some ways to thrive in 2019 and beyond.

Industry Threats

Here are a few of the threats we see today:

A national lawsuit is alleging anti-trust restraint of trade by several prominent law firms in the structure of the cooperative payment of commission dollars to buyer’s agents.

California Supreme Court defines independent contractor arrangements in such a way as to make the real estate independent contractor structure untenable.

iBuyer firms to take meaningful share of brokerage transactions within a few years.

Technology platforms to dominate the industry within a few years, whether from national franchise firms or alternative brokerage firms such as Zillow and Redfin. Those without are projected to be at a competitive disadvantage.

Household formations will continue to run ahead of home construction as we are entering a period of continuous scarcity of inventory.

The scarcity of inventory will cause prices to continually rise ahead of household incomes, causing affordability to be under pressure in many markets where most of the new jobs are locating.

The continued increase in Realtor® membership against a backdrop of low inventory continues to drive commission rates downward.

The entry and growth of low-cost brokerage models drives gross margins to new lows in many metro areas.

The growth of the number and size of teams adds to this pressure.

That summarizes most of the significant threats that we hear about today. Some of these challenges have been faced in the past in different ways and with different players. Now for the opportunities.

Industry Opportunities

In every new iteration of our industry, there are bright spots. Here are a few:

The use of agents by consumers hit an 18-year high in 2018 at 90 percent. Even millennials used agents to buy and sell at a 92 percent level (Harris Insights/REAL Trends 2018).

Nearly two-thirds of all consumers still found and chose an agent because of a relationship of some kind.

Millennials and Gen Z have the same appetite for homeownership as all previous generations, and they will become the largest, most prosperous and most educated generations in American history.

Gross commission incomes came in at just over $72 billion in 2018. The average commission rate remained above 5 percent during the year. Total commission revenues were flat in 2017 even though unit sales were down.

Technology is driving fewer agents to do more of the business. For the top 10 percent of agents and teams, productivity is rising. The real promise of technology to equip agents and brokerage firms so they all benefit from increased productivity has not been fully developed yet but it will be.

What Can Be Done?

There is nothing the typical brokerage firm, agent or team can do about the litigation mentioned above, nor was there anything they could have done with similar legal actions in the past – except support your Realtor® organi-zations and national real estate firms’ efforts to get them resolved.

There is nothing the typical brokerage firm can do to affect housing supply, affordability, and household form-ations. They are beyond your reach. Brokerage firms can’t likely match the capital of the iBuyer firms, but, in some cases, they can either have their modest programs, point out the weaknesses in their approaches to buying homes, and work with those who want to work with you. Some market economists believe that—at most—these firms may achieve 10 to 15 percent market share in the next five to 10 years.

Understand that the growth of the low-cost brokerage models will reduce the number of agents and teams who will see the traditional, full-service model firms as an attractive alternative. That doesn’t mean every agent thinks that the financial relationship between the agent and the brokerage is the only issue—or even the most critical issue—affecting their choice of firm.

It does not mean the end of traditional brokerage. It implies that brokerage must reconfigure their offerings, not play the game on the low-cost model’s turf.